Will Long Term Care Ruin Retirement Plans?

Abstract

Long term care expenses represent a known unknown in retirement planning. A large majority of households will need some sort of long term care support as they age and costs for certain types of long term care, like nursing homes, can run over USD 100,000 per year. However, most families will not incur hundreds of thousands of dollars of expenses. Who's at risk?

We use a simulation-based framework to analyze how often long term care expenses are likely to cause ruin in an otherwise prudently-constructed financial plan. Our framework also enables us to estimate long term care usage by type of service and calculate a distribution of total care costs for a particular household.

We find that roughly 85% of couples will utilize long term care prior to death. Long term care expenses impact financial plan sustainability at a declining rate as wealth increases from USD 1mn to 10mn. At a portfolio value of USD 1mn, adding long term care expenses to the simulation results in ruin, defined as depleting the portfolio entirely prior to the death of both members of the couple, about 30% of the time. With certain caveats discussed in the paper, we estimate that failure rates increase by 9 percentage points for USD 5mn households, and increase by about 5 percentage points for USD 10mn households. We also find that female-female same sex households are particularly at risk due to elevated longevity and higher incidence of long term care usage.

In summary, financial plans that don't incorporate long term care expenses can significantly overestimate the long-term sustainability of the plan.

Keywords: Long Term Care, Retirement, Financial Planning

JEL Classification: D14, I00, J26, J32